“If we have a billion people using Android, you think we can’t make money from that? All it would take is $10 per user per year.”

Google can’t make money directly off of the sale of the Android OS, like Microsoft (MSFT), because of its Open Source roots, so a billion times zero is still zero. How can Google reach the $10 average per handset?

Goldman Sachs’ (GS) James Mitchell sees a number of ways in which Google can, and already has, started to financially reap the benefits of Android’s success. In a note to investors, he states:

We believe that Android accelerates smartphone and mobile search usage, boosting Google’s operating income by $300 mn, or 2%, per year.

Use of Android rather than iPhone reduces TAC payments to hardware manufacturers and carriers, which we estimate protects Google’s operating income by $500 mn, or 3%, per year.

Google collects a 30% share from Android market app purchases, which we believe ends up being low margin, and we estimate a 40% sharefrom mobile in-app advertising via AdMob.

Google could use Android to evolve into a virtual telco, providing a single contact number and popularizing its Internet-based calling services, helped by its stake in Clearwire.

The last point hasn’t been talked about much, but I think it deserves some attention. With Google Voice, Google is able to circumvent the telcos and deal directly with customers. If they enable their GoogleTalk VoIP service on telephone lines, they could offer a lower cost voice service to their Android customers, who would only need to pay a carrier for data.

Typical smartphone data plans average around $100/month, but unlimited mobile data plans are $40/month. Google could take that another step further by becoming an MVNO and billing their customers directly. Their stake in Clearwire and their relationship with all of the carriers help in this regard.